A new president for Mexico: will the real AMLO please stand up?

What direction will the new Mexican president take? As of yet, this is unclear, and we will maintain limited positions in Mexico until we get more clarity.

Dimitri

Chatzoudis

Executive Director, Portfolio Manager

Speed read

Landslide victory for left-wing López Obrador

Varying statements in the campaign make policy direction unclear

For now, we have limited positions in Mexico

In line with the polls, Andrés Manuel López Obrador (AMLO) won the Mexican presidential elections by a landslide. According to the quick count announced by the electoral authority, AMLO captured over 53.0% the votes. His nearest rival, Ricardo Anaya, got only close to 22.5% of the votes. AMLO obtained more votes than his three opponents combined and secured the largest presidential victory in Mexico’s history. AMLO’s party, Morena, and its coalition partners look to have secured a simple majority in Congress. The inauguration of the new president will be on 1 December.

Who is the real AMLO?

In AMLO’s past speeches and initial steps of his campaign, he was very left-leaning and nationalistic in tone. Once the polls strengthened, the tone became more conciliatory versus businesses and markets. The key question remains ‘Who is the real AMLO?’ Will he be a moderate president or will he be of the more populistic and nationalistic kind? During his campaign, AMLO said he would double pensions for the elderly upon taking office on 1 December, as a first step to reduce Mexico's disparate income levels. He also said that he would be fiscally disciplined and that taxes would not be raised. Early in his campaign, Mr López Obrador had often used confrontational language when referring to Mr Trump. In his victory speech, however, he struck a more conciliatory note, saying he would seek "friendly relations".

Given these mixed signals that we have been getting from Mr López Obrador, we will base our investment decisions on the actual policies that he will pursue and not on the statements that he has made in the election campaign. Besides that, the current market environment in emerging markets is such that politicians will not easily get the benefit of the doubt like Brazil got in 2016. The rising risk of a trade war, the Fed raising interest rates and an unpredictable US president have made the market much more risk averse than in 2016.

Four key policy areas to watch

In our view there are four key policy areas that have to be monitored closely:

Fiscal discipline Mexico has had responsible fiscal policies in the last decade. As a result, Mexico's total debt to GDP stands at a comfortable 47% and the fiscal deficit is expected to be around 2.4% in 2018. It is expected that the election promises of AMLO (including infrastructure spending) could cost between 2% to 2.5% of GDP a year. At the same time AMLO promised to be fiscally disciplined without increasing taxes. He clearly cannot attain both these goals. More clarity is needed on how these different promises will be balanced.

NAFTA negotiations In his past speeches, Mr López Obrador has been very vocal that he wanted to have a much tougher and harder line in the negotiations with the US. More recently he said he would respect the existing team renegotiating NAFTA. A new NAFTA treaty is important for attracting foreign direct investments into Mexico. It will be important to see whether AMLO will be able to get this new deal.

Energy reforms The private sector has committed close to USD 200 billion in investments on the back of the recent oil field auctions. It is important that new policies from the new government do not put these investments at risk.

Central Bank independence AMLO has said that he would respect the independence of the Central Bank. We need to see that this is followed through, also for decisions that would not be in line with the preferences of the new government.

Small positions

We currently hold small positions in Mexico in our emerging markets equity funds. We believe this is the appropriate stance given the economic and political uncertainty. We are however open to increasing our positions in the future, but this will depend on more clarification on the policy direction that the new president will take.